Despite interest rates falling for the first time since the initial Covid lockdown in March 2020, borrowing costs remain high.
What are interest rates, and why do they fluctuate?
An interest rate indicates the cost of borrowing money or the return on saving it.
The Bank of England adjusts rates to manage UK inflation, which is the price rise over time. Ultimately, the goal is to encourage reduced spending, which helps lower inflation by decreasing demand. As inflation starts to fall, the Bank may choose to hold rates steady or reduce them.
When will UK interest rates decrease further?
The current Bank rate is 5%, after remaining at 5.25% for several months—the highest level in 16 years. Inflation has significantly dropped from its peak of 11.1% in October 2022. The main inflation measure, the Consumer Price Index (CPI), reached the 2% target in May and stayed steady in June—its lowest rate in nearly three years. In fact, there are more predictions for further cuts this year. Sanjay Raja – Chief Economist at Deutsche Bank Research explains that “A September cut should not be off the table. And it’s entirely conceivable to think that we could get multiple more rate cuts this year.”
Bank of England governor Andrew Bailey said following August’s rates decision: “Inflationary pressures have eased enough that we’ve been able to cut interest rates today.” But he warned: “We need to make sure inflation stays low and be careful not to cut interest rates too quickly or by too much.” As aforementioned, there may be a pause until the next cut, but it may not be as far away as we think.
The Bank stated earlier this month that it anticipated the CPI inflation would keep rising. Threadneedle Street predicts that headline inflation will rise to 2.75% by the end of the year before decreasing to 1.7% within two years.
Despite the moderation in inflationary pressures, households continue to feel the strain. A decline in inflation doesn’t mean that prices are decreasing, but rather that they are increasing at a slower rate.
How much could interest rates decrease?
Although UK inflation has reached the Bank’s 2% target, it is expected to rise slightly over the year before stabilizing in early 2025, making it challenging to predict the future of interest rates.
In May, the International Monetary Fund (IMF) suggested that UK interest rates should decrease to 3.5% by the end of 2025.
A commentary from our Mortgage Adviser
Jonathan Birkett, PK Group’s Mortgage Adviser says: “Following the Bank of England cutting the base rate for the first time in over four years we’ve now seen lenders reducing their mortgage rates for homeowners, home movers and first-time buyers alike. Should inflation remain low, then the expectation is for further reductions in the coming months and into 2025. At PK Group, we’re happy to assist with a review of your mortgage, or advise on your options if you hope to purchase. Please do get in touch to arrange a free appointment.”
Get in touch
Did you know that as part of your benefits, you will receive free independent mortgage advice? Please contact Jonathan Birkett, our Equity Release and Mortgage Adviser for more information. You can discuss your requirements, be it a first time purchase or securing the best remortgage rates, via jonathan.birkett@pkgroup.co.uk or +44 (0)20 8334 9953
PK FINANCIAL PLANNING LLP is authorised and regulated by the Financial Conduct Authority (‘FCA’), 12 Endeavour Square, London E20 1JN. Your home is at risk if you do not keep up repayments on a mortgage secured on it.
